Nov. 23 (Bloomberg) -- Consumer confidence in Italy, Europe's fourth-biggest economy, unexpectedly rose to the highest in three years in November, suggesting economic growth is gaining momentum as the European Central Bank prepares to raise interest rates.

An index based on a poll of 2,000 households by the Rome- based Isae Institute rose for a third month to 108.8 from a revised 105.6 in October. Economists expected a decline to 105, according to the median of 24 estimates in a Bloomberg survey.

Rising confidence is among the signals the ECB is watching for as it prepares to raise rates at its next policy meeting on Dec. 1. An increase in confidence may also boost Prime Minister Silvio Berlusconi, who trails his opponent Romano Prodi in the most recent polls for the April 9 elections. Consumer spending, which makes up two thirds of the $1.6 trillion economy, helped pull the country out of recession in the second quarter.

This is ``encouraging for the next few months,'' said Lorenzo Codogno, co-head of European economics at Bank of America Corp. in London. ``Still, we're departing from very, very low levels of confidence and we're only now recovering to a point last seen two or three years ago.''

The current level is below the index's five-year average of 113.5. The 23-year-old consumer confidence survey peaked at 130.8 in November 1988 and reached a record low of 93.7 in April 1993.

Best in Two Years

``The improvement is particularly strong regarding the outlook on the general economy,'' Isae said in the report today. An index measuring consumers' outlook for the economy improved to minus 92, the best result in more than two years. Business confidence rose to an 11-month high last month.

French manufacturers may show increased confidence in November, while the Ifo economic institute's index of German business confidence probably was at 98.6 after October's 98.7, separate surveys of economists showed.

Italian growth this year will still lag behind that of the euro region for the ninth year in 10. As one of the countries that use the euro, Italy will have to cope with higher rates after ECB President Jean-Claude Trichet on Nov. 18 said the bank is ready to ``moderately augment'' borrowing costs to keep inflation in check.

Italy's economy, the least competitive in Europe according to the World Economic Forum, will suffer if the ECB does raise its benchmark rate, Deputy Finance Minister Michele Vietti said today in Rome. ``A country that is stuck in the mud is in need of more accessible credit, because that is the only way to accelerate the step toward growth and toward competitiveness,'' Vietti said.

Third-Quarter Slowdown

Italian economic growth slowed to 0.3 percent in the third quarter from 0.7 percent in the second. By contrast, expansion in the euro region accelerated to 0.6 percent, the fastest pace in more than a year.

Consumers and businesses have struggled to cope with a 36 percent jump this year in oil prices. A family of four will pay as much as an additional 1,000 euros this year on gasoline and energy bills, according to consumer group Codacons.

Interest rate futures were little changed today, with the implied yield on the June contract at 2.86 percent. The euro was fell 0.3 percent to $1.1778 at 2:05 p.m. in Milan, down 13 percent against the dollar this year.

The Euribor futures contract settles to a three-month interest rate that has averaged about 14 basis points more than the ECB's key rate since the currency's introduction.

Italians are also concerned about their personal finances over the next 12 months, the report said.

Retail Pain

Retailers such as Bulgari SpA posted a greater-than-expected decline in profit in the third quarter. Indesit Co., Europe's third-largest home-appliance maker, blamed lackluster spending and higher raw-material costs for a 63 percent drop in third-quarter earnings. Italian clothing maker and retailer Stefanel SpA said profit fell 48 percent amid weak sales.

``There are some good signs, but the recovery is still quite fragile,'' said Bruno Colombo, chairman of I Viaggi del Ventaglio SpA, an Italian tour operator.

European politicians and businesses have called on the ECB to hold off on an interest-rate increase until the economy shows further signs of accelerating. French consumer spending on manufactured goods unexpectedly fell for a second month in October and consumer spending in Germany dropped in the third quarter.

In Spain, economic expansion slowed in the third quarter as growth in consumer spending and investment cooled, the National Statistics Institute in Madrid said today. The economy expanded 0.8 percent from the second quarter, when it grew 0.9 percent.

Investors expect the bank to raise its benchmark rate from a six-decade low of 2 percent on Dec. 1. Trichet said earlier this week a preemptive strike against inflation should not be assumed to be the first of many such rate moves.

There are signs the economy in the euro area will pick up, European Commissioner for Economic and Monetary Affairs Joaquin Almunia said yesterday. ``Our forecasts point to an improvement and consolidation of the recovery in the euro area.''

The euro area will expand 1.3 percent this year and 1.9 percent year, the commission predicts.

To contact the reporter for this story: Sheyam Ghieth in Rome at sghieth@bloomberg.net

Last Updated: November 23, 2005 08:17 EST